Lending sector takes a major hit

The stocks of companies heavily involved in the sub-prime mortgage market fall steeply as backing from Wall Street tightens up.

Shares of companies that make high-risk home loans took another nose dive Monday after analysts questioned whether a leading industry player, New Century Financial Corp. of Irvine, was headed for bankruptcy.

New Century is "much closer to death spiral, if not already in it," analyst Kenneth Bruce of Merrill Lynch wrote in a note to clients. "Bankruptcy could prove to be the best way to preserve value."

Shares of New Century plummeted $10.09, or 69%, to $4.56 on the heels of the company's disclosure Friday that it was the subject of a federal criminal probe. Other big losers included Fremont General Corp. of Santa Monica, down $2.82, or 32%, to $5.89; Accredited Home Lenders Holding Co. of San Diego, which fell $5.64, or 26%, to $16.06; and Newport Beach-based Impac Mortgage Holdings Inc., down $1.91, or 32%, to $4.05.

The sub-prime lending industry, which makes home loans to buyers with spotty credit records and is concentrated in Southern California, has been in free fall as the housing market softened, driving up defaults and drying up credit.

The latest sell-off came on a day pockmarked with bad news for the industry.

Fremont General, which said Friday that it was getting out of the sub-prime business, told many employees in its residential lending unit to stay home on indefinite paid leave. And soured mortgages claimed the first home lending casualty in the Sacramento region with the demise of Folsom-based Central Pacific Mortgage.

"The negative headlines just keep pouring in, and it has affected a lot of investors' views of the sector," said Chris Wolfe, an analyst with Fitch Ratings.

Meanwhile, a major brokerage firm cut its investment rating on mainstream mortgage companies such as Countrywide Financial Corp. of Calabasas, many of which also operate sub-prime units.

"The rapid high-profile demise" of the sub-prime lending industry has caused market disruptions that are bound to spill over to the prime lending market, Bruce Harting of Lehman Bros. Holdings Inc. said.

The critical issue now for many sub-prime lenders: whether the funding they need to keep their businesses afloat will be cut off by Wall Street banks and brokers that had been all too happy to fund them in the boom years.

It's an especially crucial question for New Century, which has borrowed billions of dollars to finance its mortgages.

"We're not suggesting that New Century is on the verge of demise, but they are at the mercy of their short-term lenders," said Wolfe of Fitch.

The company said in a regulatory filing Friday that it was working with its lenders and declined to comment Monday about the likelihood of a bankruptcy filing. The industry already has lost at least a dozen players to bankruptcies and other factors.

New Century, which shocked Wall Street last month when it said an earnings restatement would erase last year's $268-million profit, disclosed that prosecutors were focused on accounting issues and stock trading by company insiders. The Securities and Exchange Commission and the company's own audit committee are also investigating, New Century disclosed.

New Century is the biggest independent sub-prime lender. No. 2 Fremont General reported last week that it expected to agree to a cease-and-desist order from federal regulators tied to improper lending practices. Although an undisclosed number of its employees were sent home Monday, the company said some personnel would remain on site to handle customer inquiries.

Troubles in the sub-prime sector are also rubbing off on home builders. In a report Monday, analyst Kathleen Shanley of Gimme Credit said "the implosion of sub-prime lenders like New Century and Fremont," coupled with a regulatory crackdown on lending practices, could squeeze some low-credit home buyers out of the market, hurting builders such as Lennar Corp. and Ryland Group Inc.

In one potentially good sign Monday, Citadel Investment Group agreed to buy Brea-based ResMae Mortgage Corp. for about $180 million, beating out Credit Suisse Group in a last-minute auction for the bankrupt mortgage lender. That suggests there's an appetite for the ruins of sub-prime lenders.